Page 414 - Corporate Finance PDF Final new link

NPP

414 Corporate Finance BRILLIANT’S

Solution:
(a) Calculation of Pay-Back Period

Year Machine A Machine B
C.I. Cumulative C.I. C.I. Cumulative C.I.
(`) (`) (`) (`)
1 50,000 50,000 20,000 20,000
2 40,000 90,000 30,000 50,000
3 30,000 1,20,000 50,000 1,00,000
4 20,000 1,40,000 40,000 1,40,000
5 20,000 1,60,000 40,000 1,80,000

P.B.P. for Machine A = 3 yrs.
20,000 12
P.B.P. for Machine B = 3 yrs. + = 3 yrs. 6 months
40,000
On the basis of pay-back period, Machine A is preferable.
(b) Post Pay-Back Profitability
Machine A : 1,60,000 – 1,20,000 = ` 40,000
Machine B: 1,80,000 – 1,20,000 = ` 60,000
A B
40,000 100 60,000 100
Index of P.P.B. Profit
1,20,000 1,20,000
= 33 1 % = 50%
3
On the basis of post pay-back profitability, Machine B is preferable.
Illustration 5.1.3
A company is evaluating a proposal to acquire a new plant for its production department.
The cost of the plant is ` 4,50,000. The plant has a useful life of 10 years and is expected to yield an
annual profit of ` 75,000 after depreciation but before tax. Depreciation is charged @ 10 percent on
straight line basis. Tax rate 40%. Compute the Pay-back Period.
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h¡& ßbm§Q> H$s bmJV < 4,50,000 h¡& ßbm§Q> H$m Cn¶moJr OrdZ 10 dfm] H$m h¡ VWm S>o{à{eEeZ Ho$ ~mX {H$ÝVw Q>¡³g Ho$
nhbo < 75,000 dm{f©H$ bm^ CËnÝZ H$aZo H$s Anojm h¡& S>o[à{eEeZ ñQ´>oQ> bmBZ AmYma na 10% bJm¶m J¶m h¡& Q>¡³g
aoQ> 40% h¡& no-~¡H$ nr[a¶S> H$s JUZm H$s{OE&
Solution:
Calculation of Annual Cash Flows: (`)
Pre-Tax Profits 75,000
Less : Tax @ 40% 30,000